As of this writing, dairy prices are at record levels and livestock prices are rebounding, but grain prices are trading at 50-60% below their record levels of a few years ago. As a result, farmer income is now expected to be down 14% this year. The one bright spot for all equipment dealers is some pending legislation pertaining to bonus depreciation that, if passed, should give the equipment end-user a reason to make a purchase by year-end. Other than that, dealers in the grain belt should make systemic changes that will enable them to weather a protracted downturn.
What to do? First, stop the “rolls.” These mega deals may have worked in an up market, but they will devastate a balance sheet in a down market. This will be challenging for dealers whose profitability is dependent on their manufacturer’s volume bonus. The question should be: Do you chase paper profits or do you maximize positive cash flow?
Second, immediately reprice all used equipment. This will undoubtedly have a deleterious impact on the P&L statement. But prices are not going to rise. In fact, auction yards are already filling up and will be overflowing by the end of the year. Jockeys are becoming reluctant to take late model, high dollar, low hour equipment as purchasers are scarce. Get out now.
Third, cancel or reduce all new equipment orders for fall and 2015 deliveries. Cancellations may be difficult, as manufacturers will begin to play hardball. With one manufacturer already announcing a reduction of over 1,000 factory workers, the other manufacturers will soon follow with similar announcements. As a result, they will resort to begging, cajoling and threatening their “weak” dealers to take equipment that they don’t need, while holding firm on already submitted orders from other dealers.
Additionally, their “just-in-time” inventory, which has been a joke in the best of times, will now mean that they will ship it to you as soon as it rolls off the assembly line, which could mean many months earlier. If possible, refuse delivery unless interest free terms, as well as additional concessions, are extended.
Fourth, unless strategically important, refrain from purchasing any other dealerships. As equipment sales decline and profits inevitably dwindle, so does the overall value of the dealership. Dealership valuations next year will be significantly below what they are right now.
Fifth, shelve all plans to build a “monument” to the manufacturer or yourself. This is not the time to undertake large capital improvement projects that will adversely impact expenses for months and years to come.
Sixth, assess all dealership personnel. Employees with poor or negative attitudes should be purged immediately. They should never have been retained, but the last thing that you need in a down market is a “prophet of doom” proclaiming the end is near. More than ever, you want to staff your dealership with highly enthusiastic, customer focused employees.
Seventh, review all dealership expenses. Are tech wages and benefits in line with labor sales? Are service management wages and benefits in line with total service sales? Are parts salaries in line with gross margin dollars? Do you have a credit in both your shop supply account as well as your unrecovered freight account? Is overtime kept to a minimum? Are store hours consistent with store traffic?
Eighth, more than ever, salespersonnel will need to focus on making customer contact. While competitive dealers retreat, smart dealers will use this time to continually contact customers, both existing and conquest customers. The next 18 months should not necessarily be about making a sale, but rather about solidifying the relationship. Similarly, this is the time to purge all order takers as any benefits they may provide will be far outweighed by their cost to the dealership.
Ninth, vigorously and aggressively pursue all activities that will positively impact the balance sheet and/or improve dealership cashflow. At a minimum, this should include eliminating all shortlines, equipment and parts, that are not worth keeping. Rational thinking should replace emotional keepsake. The parts inventory should be scrubbed to purge all obsolete and excess parts. Work orders should be completed expeditiously thereby minimizing work-in-process. And, warranty work orders should be submitted immediately upon the job being completed.
Looking forward, one would be wise to remember the clarion call that Thomas Paine issued at the beginning of the Revolutionary War. Those timely and prescient words are as follows.
“These are the times that try men’s souls; the summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph.”